Lifetime Fitness 2008 Annual Report Download - page 55

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LIFE TIME FITNESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)
49
Impairment of Long-lived Assets — The carrying value of long-lived assets is reviewed annually and whenever
events or changes in circumstances indicate that such carrying values may not be recoverable. We consider a history
of consistent and significant operating losses to be our primary indicator of potential impairment. Assets are grouped
and evaluated for impairment at the lowest level for which there are identifiable cash flows, which is generally at an
individual center level or corporate business. The determination of whether impairment has occurred is based on an
estimate of undiscounted future cash flows directly related to that center or corporate business, compared to the
carrying value of these assets. If an impairment has occurred, the amount of impairment recognized is determined by
estimating the fair value of these assets and recording a loss if the carrying value is greater than the fair value. Based
upon our review and analysis, no impairments on operating assets were deemed to have occurred during 2008, 2007
or 2006.
Derivative Instruments and Hedging Activities. As part of our risk management program, we may periodically use
interest rate swaps to manage known market exposures. Terms of derivative instruments are structured to match the
terms of the risk being managed and are generally held to maturity. We do not hold or issue derivative financial
instruments for trading purposes. All other contracts that contain provisions meeting the definition of a derivative
also meet the requirements of, and have been designated as normal purchases or sales. Our policy is to not enter into
contracts with terms that cannot be designated as normal purchases or sales.
In 2007, we entered into an interest rate swap contract that effectively fixed the rates paid on a total of $125.0
million of variable rate borrowings. The contract fixed the rate on $125.0 million of borrowings at 4.825% plus the
applicable spread (depending on cash flow leverage ratio) until October 2010. The contract has been designated a
cash flow hedge against interest rate volatility. In accordance with Statement of Financial Accounting Standards No.
133, “Accounting for Derivative Instruments and Hedging Activities,” changes in the fair market value of the swap
contract are recorded in accumulated other comprehensive income (loss). As of December 31, 2008, the $4.7
million, net of tax, fair market value of the swap contract was recorded as accumulated other comprehensive loss in
the shareholder equity section and the $7.5 million gross fair market value of the swap contract was included in
long-term debt. We determined the fair value of the swap contract based upon current fair values as quoted by
recognized dealers. As prescribed by FASB Statement No. 157, Fair Value Measurements (“SFAS 157”), which is
subsequently discussed under Fair Value Measurements, we recognize the fair value of the swap liability as a Level
2 valuation.